UNEMPLOYMENT AS A PROBLEM
OF TURNOVER CREDITSAND THE SUPPLY OF MEANS OF PAYMENTby Prof. Heinrich
RittershausenMFN, the monetary freedom network
got permission from: Annals of Collective
economy, a trilingual
magazine from Geneva (which still exists but
with a very fragmented...eh...sorry, "specialized" focus, contrasting starkly
with back then when Milhaud was holding the editorial and publisher's reins),
to reprint the following 1935 documentSee also: "Mutua1 Marketing ; a Remedy for Unenmployment",in the Insurance and Finance Reviews. Calcutta,
1931) (8).This article was written in the early thirties and published
by anINTERNATIONAL REVIEW IN FOUR EDITIONS:ANNALS OF 'COLLECTIVE ECONONY~ANNALES DE'L ECONOMIE COLLECTIVEANALES DE LA ECONOMIA COLLECTIVAANNALEN DER GEMEINWIRTSCHAFT

Edited by EDGARD MILHAUDProffesor of Economics in tbe
University of GenevaVOLUME 10 — 1934

CONTENTSa note about MFN, the
1987 republishers A Banks of Issue and Banknotesas Means for Organising Mutual
Markets 1. Need of an organisation linking production
and consumption. 2. Bill transactions. 3. The transition to the modern credit aystem. 4. The Scotch banknotes as the basis for the
classical theory of banks of issue. 5. The deferred proceeds from sales as a bosis
for tumover credit. 6. Turnover credit. 7. The turnover credit operations of banks. 8. The redemption of the banknotes issued. 9. Note credit as exchange or conversion credit.10. The source of the tumover credit.I I. Elasticity and exclusion of abuses.12. Excluding the danger of inflation oy means of
the principle of free market rates for means of payments, whilst avoiding
legal tender and forced currency.13. Procuring work through turnover credit or through
capital credit.14. The concept "monetary standard" and worked
currency.15. A danger of inflation in procuring employment
is only possible where there is a forced currency.16. Clearing operations as completing the classical
system. B The Gradual Destructon
of the Classical System from 1909 to 1932 as Cause of the Difficulties
encountered in Reintegrating the Workless1. Culmination and decline of the classical system.2. The obecuration of the classical bank conceptions
through the separation of the functions bettveen note and deposit banket— 3. The centralisation of the banks of issue
as the boundary line in the transition from banknotes to paper money.— 4. Decline and fall of the classical syatem
through the abandonment of convertibility and the introduction of a forced
Currency. 5. The abandonment of convertibility and its
consequences 6. A forced currency regime, the idea of a Central
Bank, and inflationiam, are identical. 7. After the fall of the banks, followed the
destruction of the German monetary system through its passing from commercial
bill money to financial bill money. 8. The Reichsbank, temporanly the largest mortgage
bank, for lack of a sound banking system, present the re-employment of
the workless. — 9. Fateful compensation of an inflation of financial
bill money with a deflation of commercial bill money.10. Misconceived rehabilitation of the banks augments
unemployment.
part 2 kicks in here11. The unnecessary sacrifice of the gold and foreign
exchange holdings of the Reichsbank intensified unemployment. _12. From what quarter does inflation threaten to-day
? —13. Aggravation of the situation through the mistaken
expectation of devaluation.— (a) The Bank maintains its traditional
end statutory gold purchasing rate. (b) Now as to the altemative way.14. Is the Central Bank system or are free banks more
favourable to increase in employment and trade recovery15. Decline of the credit system and aggravation of
the unemployment problem as the outcome of an unhealthy development during
severol decades.—

C The Coopensation Principle
end the "Vier Gesetz-entwuerfe' (Four Draft Laws) for Reintegrating the
Workless in the Economic Process 30I. From Payment to CompensationII. Draft Law concerning Compensation
Banks 34III. Draft Law concerning the Issue
of Treasury 40 IV. Draft Law concerning
the Raising of Annuity Rates end the Lowering of Real Interest Rates through the Introduction
of Compensatlon in Loans V. Draft Law concerning Calculating
in Stabilised Values 46 D Results 491. Principal conclusion: need
of not fixing a limit to means of payment.—2. Practical part solutions:
The system of Central Banks and the future of our banking and settlement
systems.—3. Limits of thc significance
of turnover credif for thc solution of the unemployment problem._

Tripod
tool Nedstat installed end of nov 98 but not correctly till july 99
File
created in nov 98

Besides being available on microfiche this document
was reprinted earlier with permission of the Director of the "Annals of
Collective Economy' by MFN, the Monetary Freedom Network 1987A number of documents in the same
vein (the ones here happen to be taken from
the same mag, same issue even) but all in
German can be found at: http://www2.free.de/GELD
with links to sites in English

MFN, the Monetary Freedom Networkis an internatlonal communication
means for people who are interested in money- and payment systems different
from the conventional ones. We regard the money monopoly of the State as
the main cause of mass unemployment fluctuations of the market end widespread
insolvency (over-indebtedness). The edltors of the MFN Newsletter advocate
the positron of Decentralisn, Antimonopolists end Freedom of Experioent
in the money- and banking sphere. In the relevant literature this econoolc
state is called monetary freedoo (not to be confused with the "free money"
movenent after Silvio Gesell; it mostly supports monopoly money even though
it is called -free money- moveaent).The criticism of today`s banks
end their monopoly money is constantly increasing, particularly since the
last high interest phase 1981/82 and the strongly growing unemployment
during that time. Among many observers the internatlonal debt crisis produced
the iopression that it will lead to a financial crash. The actual phase
of relatively (I) low interest rates doesn`t solve the monetarily created
problems, it only retards their further expansion. In our opinion the situation
becomes really dangerous when interest rates rise clearly (in the meantime
a light interest increase and the announcement of higher interest rates
to come was one of the causes of the international crash at the stock exchanges).
- Another million workless strongly growing right wing radicaliso end double
the inso;vent coapanies are the possible consequence . But we don`t want
to spread panic llterature, we'd rather supply informations about emancipating
antimonopolistic money- and banking systems. Maybe the big financial crash
is really cooing soon - should we wait until the State will issue new monopoly
money after the same old system, just with the heads of the newest ministers
of finance staring from the banknotes ?

Except for an extremely small
number of persons there is a world wide lack of knowledge about independent
end decentral money issuance. The absence of even the most elementary knowhow
can simply be explained: since 1914 at the latest the money monopoly of
the State has essentially been enforced in all countries, end in thls point
oarxist, fascist end capitalistic countries don`t differ froo each other
at all. The "Essentials. of the money monopoly or its conplete foro consist
of a coobination of three sinqle monopolies, which relate to one monopoly
commodity, i.e. the banknotes end coins of the State`s Central Bank (in
today's monopoly money the coins are only banknotes printed on metal with
the metal value having no significance for the payments system): Compulsory
market rate (i.e. compulsory acceptance and compulsory value), Note issuing
monopoly end the payee`s legal claim (title) to standerd money (today banknotes).Since 1914 at the latest these
have been the unexpressed prerequisites of the established monetary science
as welf as of oost social reformers who occupied themselves with money.Monetary freedom means Freedom
of Standard, Freedom of Issuance (Freedom of Compensation) end the absence
of the payee`s legal claim (title) to payment in standard money. This last
freedom is the most iaportant ln the ooney - and banking sphere end has
been refused by the State since at least 2000 years.In our newsletter we will write
about ooney theories (particularly about the - as we see it - most advanced
one of Ulrich von Beckerath, 1882 - 1969), report about practical experioents
end publish address lists of interested people, bibliographical sources,
book lists end dates of events.The Newsletter is avallable in
gernan language; english literature upon request.MFN = Siegfried Schwenke, Berlin
+ Theo Megalli Postfach 380161, D-8000 Munich 38.

UNEMPLOYMENT AS A PROBLEM OF TURNOVER CREDITSAND THE SUPPLY OF MEANS OF PAYMENT.

By Dr. H. RITTERSHAUSEN,Lecturer at the Univerdty of Frankfort o/M.Many a scanning mistake is not
ironed out yet but I thought the material urgent enough to go ahead already;
help on taking the glitches out is welcome pietI integrated the footnotes in
this colour

A) Banks of Issue and Banknotes as Means for Organising
Mutual Markets.

1. Need of an organisation linking production and consumption.—It
is manifestly not enough to state theoretically that the proceeds resulting
from production are turned into incomes by the payment of wages end other
disbursements. On the contrary, it is essential to establish a firm end
continuous organised relation between production end consumption. The ideal
of such an organisation might be found in a contractual agreemcnt of the
individuals concerned, to obtain goods end services of every kind only
from one another. Given efficient organisation. such a group could not
suffer from unemployment and could therefore guarantee to find employment
for its members. (see my work: Der Neubau des Deutschen
Kreditsystems (The Restoration of the Cerman Credit System), February 1932)
Historically, it is not such marketing groups, teut gradually developed
collectivities, that play an important part. In the Middle Ages it was
the village end town corporation which for centuries rendered the greatest
service in organising the relations between producers and consumers. After
the Middle Ages. these organisations were widely dispensed with. They were
superseded by the modern economy with its many private exchange corporations,
the banks. Accordingly. these should not be regarded merely as gainful
undertakings. From the very beginning they had to fulfil certain functions
in the common life. which were of the greatest importance for the mutual
employment of citizens. One of the reading financial means used ever before
the genesis of the modern banking system, was the bill of exchange. The
development of banks as the paying end selling corporations of to-day out
of the transactions in bills of the late Middle Ages, cannot be convenientb
described here in detail. We shall therefore reconstruct this development
br aesuming that it happened on an island.

2. Bill transactions.—Let us leave for a moment
our modera end all too complicated environment end esamine the simple economic
life on a small island. Everybody produces end everybody exchanges his
products for those of the other producers. The necessary imporb are paid
for by esports. In the broadeat senae, conucyancea end money are required
for this. The problem of the transport of goods from place to place may
be asid to be almoat entirely solved to-day. Railways and motor traffic
serve this purpose. But the monetary problem is still unsolved end little
understood.

How could we most satisfactorily realise monetary and
credit transactions under such simple conditions. We need only assume that
everything is at lirst paid for with bills. Through the safe of my product,
I acquired a purchase price claim, a balance in money. The balance thus
acquired is here, aa in the modern economy, the natural means of payment
of the individua1, which in principle auffices everywhere. When I peraonally
buy what I require from different suppliers, the latter need only receive
bills from me wherein I surrender this balance to them. There auppliers,
in their tum, may now utilise the balance transferred to them in order
to pay for what they had bought. If the bills are made to fall due at the
date of the most important annual fair, they need only be compensated at
maturity, precisely as is the case now on Exchange seuIement days. Thus
all setding transactions could be disposed of. Should certain tradera have
bought more than they had received for their own products, the small odd
amount could be paid in cash, or coin, which in moet cases would not occasion
any embarrassment. It is clear that this method of payment, which had prevailed
for centuries, serves best in the exchange of goods. Foreign influences
could not defeat this method, provided there was no scarcity in paper end
inkt

3. The transition to the modern credit aystem.—The
above type of transactions presupposed that everybody belonging to this
payment corporation was known to the other members end therefore could
count on credit up to a certain amount. With the passing of the guilds,
this fundamental condition gradually ceased to hold. A non-descript proletariat
of labourers arose. These no longer received the greater part of their
remuneration in free board and lodging at their master's house and a single
payment at the annual fair, but were increasingly paid weekly wages in
money, which was most difficult to secure in those days. The old system
was not equal to the new strain imposed on- it. 3
The billa were moatly for large end uneven arnount.; they were indivisible;
therefore uselesa for wage payments; end they were neither guaranteed nor
due as yet. That is, they were unsuitable for a general means of payment.

4. The Scotch banknotes as the basis for the classical
theory of banks of issue.—In these circumstances, from 1695 onwards,
the Scottish banks of isauc created the banknote end called into being
the modem monetary end credit aystem. They converted the bills made out
for uneven end inconveniently large amounts into standardised notes (say,
10, 20, 50, 100 pest, mins., frcs., £s), end guaranteed them by affixing
their signature, thus excluding credit risks. Such banknotes were, broadly
speaking, "cut-up bills". They should not be confused with the notes of
the Bank of England which originated in the deposit certificates of goldsmiths
and, under Peel's Bank Act, have not yet entirely lost their character
of gold deposit certificates. If the appearance of the modern factory system
interrupted the circulation of the means of payment (by bills) at the point
where the manufacturer wished to pass on to his anonymous band of workers
the means of payment he had received for his products, the circuit wee
again closed by this invention. At thia juncture, the bank converted the
cumbersome bills into convenient end guaranteed notes, which then continued
the process of circulation.
We need now only add three complications—tumover credit, clearing
transactions, and the monopolisation of banknotes—to find ourselves
in the midst of the modem monetary and credit system end to underatand
how it is possible that the workless are not allowoed to produce
what they wish to consume and those in work cannot consume what they had
produced.

5. The deferred proceeds from sales as a bosis for
tumover credit. —To begin with, let ua examine a little more closely
how the Scottiah banknotes are put into circulation end, what is even more
important, how they pesa out of circulation. The manufacturer who aurrenders
the bills to the bank, sella dmost invariably on credit terms. The wholesaler
whom he aupplica, passes on thia credit to the retailera end thua renders
fesalble the economically indiapensable storing in shops to-day, without
which a selection of retail goods offered to customers end ready for delivery
would not be possible. Whilst therefore the manufacturer only receives
bills in exchange for hia veld producta, which perhaps mature after 2 months,
he is compelled to pay at once his workmen the wages for manufacturing
those products. This span of timc the Scotch bank of issue also bridged.
It exchanged later-maturing bills for such as were mature forthwith. By
this "diacounting'' process, it performed an invaluable aervice, one that
has to be added to the standardizatson end guarantee, to
which we have dready referred.

6. Turnover credit. — The bank, which discounts
the customers' bills of the manufacturer end thereby converts an inconvenient
into a convenient means of payment, grants credit, insamuch as it furnishes
documents due at once for such as mature at a later date. It grants this
credit only in its own banknotes.
This credit is pure goods end turnover credit, aince it does not serve
for loans on warehouse stocks, or for speculative and similar purposes,
teut aolely for facilitating the safe of goods on short credit terms, i.
e., the bridging over of the transport and sale periods. Genuine turnover
credit is only granted on the proceeds of goods already sold.

7. The turnover credit operations of banks.—The
banknotes thus put into circulation represent the counter-value of the
goods i veld by the manufacturer, teut which have not yet reached the ultimate
conaumer. lf the manufacturer veld gooda for 100.000 pest (marke, francs,
£s) end discounted, accordingly, bills to the same amount and therewith
paid wages for an equal amount (Simplified recording
to the classical equation (re the equation of: income from production,
see my work Arbeitslosigkeit und Kapitalbildung
(Unemployment end ccumulation of Capital),
1930, chapter 11), these 100.000
pes. of wage money must remain in circulation until the day the wage-earners
decide to go shopping. Naturally, until that day the products remain unbought
by the ultimate consumer. On the day that the ultimate consumer has made
his purchase, the goods cease circulating and the reflow of the banknotes
begins. The goods have been removed from the: shopkeeper's shelves end
require no longer to be financed. In their turn, the shopkeepers immediately
use the banknotes taken to pay their wholesalers, end these pay the manufacturere
out of that income, who, again. repay therewith the credit granted by the
bank. Hence the circulating period of the veld goods starts approximately
when the corresponding wages are being paid end finisbes at the point when
the goods have been bought by the ultimate consumer, when the banknotes
in the pockets of the workmen have been speet end have begun to flow bacl-
to their initial reservoir. The circulating period of the goods, that of
the goods bill,—that is, the period of the goods credit end the arcu ating
period of the banknotes,—must have been conceived as approximately the
same in the classical bank ideal. Through the time of production of the
goods coinciding with that of the money, end that of the passing of the
goods with the passing of the money out of circulation,—which banking theory
has always stipulated end which, until 1914, was realised in the operations
of the Reichsbank. (see Elster, Ad. Wagner, Lexis,
Bendixen, Schacht, end others)—a far more precise qualitative
regulation of the monetary circulation, as well as much more certain exclusion
of undesirable credit dernands, is achieved than can ever, (Bendixen in particular
hau unfortunately connected this theory with a forced currency end with
a combating of the quantitative theory although only a refinement of that
theory is needed. Thereby he unnecesaariiy exposed juat bsaic conception
to the moet serious reproaches)be offered by the currency theory
end the price level policy, especially after the ruinous experiences
of the last few years. It is therefore the task of auch a bank to grant
bill credit for just as many days as the notes ordinarily remain in the
pockets of the wage receiver (which is conditioned
by the division of expenses in the private households during the whole
wage period), plus the period covering the reflux of the notes from
the shopkeeper to the bank. Should the wholesaler, or any other links in
the chain, feel inclined to invest passingly the money received, the maturing
of the bill will prevent him from impeding the rapid reflux of the notes.
Many bank directors will, it is truc, not agree that to-day also the operations
of a credit bank ought acarcely to differ from the above process, as will
soon be shown; for, if they did, they would have to admit that their operations
in parcels of shares, in large-scale credits, and other such <operations>,
do not possess the significance they would like to ascribe to them.

8. The redemption of the banknotes issued. — By
what methods does our ideal turnover credit bank redeem its banknotes?
Not through keeping a hoard of gold—like a goldsmith's bank which issues
gold deposit certificates, in the speculative trope that holders of these
might retain the notes for a long time (Bank of England)—, teut simply
through a kind of redemption, subject to the return of the bill held. This
type of redemption is rothing else teut the cancellation of the first act
of exchange. The credits have been granted for a period corresponding to
the time taken for the goods to make their way from the factory gate to
the ultimate consumer. They become due when the stocks have been veld.
The manufacturers are also ready end forced to repay (because
they have been paid end are bound to redeem the discounted bills)
end the bank simply annuls the original exchange transaction. On the
surrender of the bank 'notes, it returns the bill documents now paid fort
In a word it exchanges bills for notes, having previoualy exchanged notes
for bills: that is, it performs the reverse operation. If the bank issues
its notes in the manner here indicated, it requires no gold reserve. The
note circulation will be sound if the bank declares 6
that it will always accept its own notes in payments to itself end
if it takes care, by only granting short-term credits and only granting
credit for the proceeds of sales to trustworthy debtors, that at its counters
a great many payment shall be received continually. The secret of the value
of such free notes lies in that there is an uninterrupted demand for them,
because notes are incessantly required for making paymen" due to the bank.

9. Note credit as exchange or conversion credit.—According
to the marvellous classical scheme, a turnover credit is therefore only
an exchange or conversion credit, inasmuch as inconvenient means of payment
are converted into convenient ones, or purchase price claims are converted
into claima against a bank. The numerous obstacles impeding the smooth
working of our present,day credit system could not arise here, since the
discount or exchange credits, to repeat it once more, are granted for only
as many days as it would take the goods starting from the factory gate
to reach the ultimate consumer. This period coincides with the number of
days during which the wage-earners retain the notes in order to possess
mean? of payment during the whole wage period.

10. The source of the tumover credit.—It is therefore
the group of note-holders who fin ance the total turn over of gooda from
producer to consumer. This group has as much purchasing power, as there
are goods in transit end in the hands of wholesalers end retailers. Through
holding the notes, the note-owners extend to the banks as much credit as
is required for financing these goods. As 100 pest (marke, frcs., £s)
are disbursed in notes by the shopping note-holders, 100 pest worth of
goods are paid for end require no longer financing. The note circulation
ia correspondingb reduced, and credit is diminished by 100 pest to the
bank and from the bank. The exchange of goods is thus financed out of a
source which is adequate as regards amount and duration and is inevitably
correlated as to yield.

11. Elasticity and exclusion of abuses.—Perennially
as much money is created as goods are produced, and as regularly as much
money is withdrawn from circulation as goods are consumed. lt need never
happen that in all branches goods are aimultaneously unsaleable because
of a deficiency of money, because the "augmentation of the available money"
threatens an inflation, etc. Lack or superfluity of turnover credit is
here precluded, since rising sales by manufacturers produce additional
bill material as well as additional amount in banknotes in the pockets
of the additionally engaged workers during the wage period (and vice versa),
so long as no serious technical mistakes are made. Deflation is out of
the question under this system, since the banks will vie with one another
in order to grant advances for the very limited genuine demands for goods,
with the result that the interest rates for sound credit could not measurable
exceed the simple manipulation costs of the banks. Nor is exaggeration
possible, although there is no metalic cover, for on the day that the notes
return, the proceeds of the goods sold reach the bank. On that day the
notes are returned to the bank by individuals desirous of repaying credits
just due. The notes will be re-exchanged, as the bonds of a mortgage bank
are debited to the current account, which are presented in natura by the
mortgage debtor for amortisation purposes. This is only a case of credit
transformation, not of credit creation. lndeed, mortgage banks are incapable
of producing an inflation if they are only engaged in converting difficult,
fungible mortgages into easy, fungible mortgage bonds, that is, in providing
a better form for an existing claim. Every abuse, every step beyond, spelle
inflation. Apsrt from transformed credit, there is only created credit,
which a1u~aga portends inflation. Only the absolute restriction to transformation
excludea inflation.

12. Excluding the danger of inflation by means of the
principle of free market rate for means of payments, whilst avoiding legal
tender and forced currency. —The restriction to transformed credits
demands effective protective measures, to prevent its becoming a barren
principle, compliance with which is left to the discretion of the banken
The Scottish system recogniaes man's infirmity end is distinguiahed from
all other systems in that it technically excludes inflation by an organisational
measure, i. e., by arranging for a free market rate for banknotes, which
contrasts both with legal tender and forced currency, both of which meen
not the amelioration, teut the deterioration, of banknotes. Once the bank
issues too many banknotes that is, once it makes other advances than for
the purchase price claims of goods transactions or grants longer credit
periode it is no longer able to redeem them by a re-exchange. It must then
seek to pay in cash, gold, foreign exchange, etc., obtained somehow, when
the notes return. If there is measurable abuse, the notes are discounted,
since there is an insufficiency of maturities to call forth the necessary
demand for them. The notes of this bank depreciate by comparison with other
sound circulating means of payment. They are reluctantly accepted at perhaps
90 or 70 % of their face value. Such a bank is precluded from granting
fresh credits, since the applicant for a credit would only receive 70 %
since he would risk having to repay the depreciated credit at 100 % end
since his employees would decline to accept such unsound means of payment.
Notes of this order would be refused, just as cheques drawn on insolvent
banks are refused. 8

13. Procuring work through turnover credit or through
capital credit.—Time end again we meet with the assertion that the
procuring of work through a sound exchange of consumable goods by means
of credit grants has an inflationary effect. The question is therefore
of decisive importance. If the workers are not to be, or cannot be, employed
through investments in virtue' of the latent accumulation of capital, we
must provide that the unemployed should produce themselves those goods
which they want to consume and that they should be placed in a position
to consume what they have produced. To realise this, sound banks and turnover
credit are prime necessities. Means of production end tools are available
in abundance in the shape mostly of shut-down works, etc. Moreover,
factories still at work and agricultural undertakings would be quite willing
to engage men if their markets could be extended. Markets, again, would
theforthcoming the moment when such unemployed were set
to work in those factories, for in that moment they would receive wages
or additional income which they would speed (and
thereby multiply orders). Such income would at first be drawn from
bank advances, until the money circuit is completed (this
rendering possible a goods circuit), until the money has flownback to the bank of issue, and until the goods have beenconsumed. Advances and note issues must precede they
cannot follow the turnover of goods, for otherwise owing to lack of means
of payment, there could be no such turnover. When the money circuit is
closed and the goods have been consumed, the game cen begin again. Hence
an unintermittent (continuous?) process of
exchange is set going, whereby in most countries three-quarters of the
population lives, namely, bymutual production and primarily mutual marketing. If
the prevailing depression was initiated in most countries by an obstruction
of the process of investment and capital accumulation, it has been greatly
aggravated by the resulting increased; obstructions in the turnover
end exchange processes.
Every attempt to procure employment by this method tends to be thwarted
by the argument of a threatened inflation. This is the more to be deplored,
as the method is apparently the easiest and the most natural to be contemplated.
It does not presuppose a prolonged indebtedness with all its attendant
dangers; neither customers nor banks run greater risks; and the turnover
credit is mostly repaid within a few weeks. The workless are not employed
just once, for one or two years, at a cost of several milliards; but they
are re-intregrated permanently in the naturel process of production. That
a healthy process of capital accumulation and of investment are also self-perpetusung
although requiring longer periode of time, the present writer has shown
in his Arbeitslosigheit und Kapitalbildung (Unemployment end Accumulation
of Capital), 1930; but the continuity is here more difficult to recognise,
more dangerous, and less popular, a reason for laying stress primarily
on having recourse once more to the turnover process, the basis of our
whole economie life and the presupposition of thrift end investing.

14. The concept "monetary standard" and worked
currency. —In order to appraise at its proper value the argument of
a danger of inflation, which is constantly raised against every proposal
of procuring employment by means of the organisation of turnover credits,
we are obliged to analyse these basic concepts and to call attention to
certain aspects which have been insufficiently studied by the monetary
conjuncturd-theoretical school of the last few decades, although they were
in the ascendant before the War in all the larger countries of the Continent,
from Germany to Spain.

The monetary standard means only the statutory declaration
that the legal unit measure of value is called by this or that name, say
"mark '' or "pound sterling" and is regarded as equal in value to so many
grammes of fine gold. The best parallel instance is the measure of length,
which is called metre, end represents the length of a platinum bar kept
in a deep cellar in Paris. Al1 metre measures the world over, which are
longer or shorter than this bar, are spurious and are not therefore legal
metres. Similarly, all German Reichsmark notes, which are worth less or
more than the statutorily fixed amount of gold, are spurious and not therefore
Reichsmarks. Such being the case, it seems inconceivable how inflation
could arise at all. The metre parallel explains this also—e. g., if the
Govemment, in order to aid the textile industry, passed a law that a metre
measure need only be made of pine-wood in order to be a legal metre measure.
Inflation starts with the "compulsory metre". The dishonest trader who
shortens a metre measure in order to obtain more money for a bale of cloth,
cannot be interfered with; for in every prosecution the court would have
to admit that the quantity of cloth had been correctly measured inasmuch
as legally prescribed pinewood metres had been used. This abuse could by
no means be stopped by smashing the platinum bar in Paris (or by abolishing
the gold standard), but solely by recking the Act conferring legal
protection on any other metre measures than the original platinum metre
kept in Paris.
Similarly, inflation of the currency cen only occur when certain paper
means of payment are declared legal tender, in which case, even if their
value is only 90, they have to be accepted at 100, that is, when they are
once declared forced currency. lt is inconceivable how the standerd mchanged by some ironmonger selling spurious metre measures,
And I can as little understand how the gold standerd of my country could
be inflated by some bank issuing private notes the value of which is only
90 or 80. Note-holders, of course, cen be cheated, but a general rise in
prices cannot occur. At moet, when convertibility is not provided for,
somebody may hasten to use the notes for payment (at
their nominal value) to the bank, with the result that the bank's
bill debtors will exhibit a keen demand for these notes. However, if the
bill material is bad, if the bills have to be constantly prolonged because
the bank has granted long-term credits or because the debtors have experienced
pecuniary embarrassments which they have not disclosed, there is no use
for such depreciated notes: no demand exists that might force them up to
par in a few hours. A lasting diacount is hence created (as
has repeatedly happened in the history of banks of issue); the bank
is paralysed; its insolvency is imminent; end other banks take its place.

15. A danger of inflation in procuring employment is
only possible where there is a forced currency. — This principle cannot
be too much stressed against the argument of a danger of inflation. All
accessory means of payment which are not legal tender, can, where there
is abuse or an excessive issue, only compass their own ruin,but never that
of the legal currency. Nor can the problem of a double currency standerd
arise where such free means of payment are involved, as little as in the
case of payment by cheque. Monetary standerd end means of payment should
be sharply distinguished. Gresham's law relates only to the coexistence
of two inconvertible forced currencies, not to means of payment having
a free market rate.
With non-compulsory private means of payment one can as little inflate
as one could destroy the value of shares on the ahare market by means of
depreciated shares. If X. issued for 100 million pest worthless shares
of a Giganta Company end finds buyers, these unfortunate folk have certainly
lost their money. It is not obvious, however, how the market rate of the
Dye or Red Tinto shares could be lowered thereby. Indeed, this illustration
shows that the Dye shares could only be depreciated if the Government statutorily
declared the Giganta shares legd tender; if, to pursue the simile, it declared
the shares as deliverable for Dye shares. The latter shares would then
depreciate greatly end Gresham's law would come into operation by driving
off the market the old end solid Dye shares. Precisely as on the share
market, so on the money market, the multiplication of convertible substitutes
for gold cen never depreciate the currency, as was also illustrated by
the example of the metre measure.
The leading money theorists have espressed themselves unequivocally on
this subject. Consult, among others, Knapp, Staatliche Theorie dea Geldes
(State Theory of Money), 4th edition, p. 161; von Mises, Theorie des Geldes
und der Umlaufsmittel (Theory of Money and of Circulating Media), 1924,
p. 331; Adolf Wagner, Zettelbankpolitik (Banks of Issue Policy), 1873,
p. 36; Lexis, Handlvörterbuch der Staatswissenschaften (Encyclopaedia
of State Sciences), 3rd edition, article "Scheck", etc.; Carl Menger, Encycl.
just cited, article "Geld", vol. 4, pp. 601 603; J. G. Courcelle Seneuil,
La Banque libre (The Free Bank), Paris, 1067; de Viti de Marco, Finanzwissenschaft
(Science of Finance), 1931: see also the Acts concerning the Kgl. Giro
u. Lehn-Banco (1765), the Royal Prussian Bank and the Reichsbank until
1910 (explicit general rejection of legal tender); R. Just, Goldinflation,
Jena, 1921, p. 113 ff.; Dr. Walter Zander, n Railway
Money end Unemployment , Annals of Collective Economy 1933; U. von
Beckerath, <` The Realisation of the Milhaud Proposals n, Annals, etc.,
1934; (the 2 last mentioned documents are reproduced
as another part of this first batch of guest appearances here as well);
Henri Meulen, Industrial Justice through Banking Reform, London, 1917;
etc. Even Lord Overstone stated that if he mismanaged his private bank
he would be ruined, teut the public would auffer little. If, however, the
Bank of England were guilty of a serious mistake, the Bank could save itself
[by means of legal tender] but not without inflicting untold suffering
on the community as a whole.
In the interest of increasing employment. it is urgently necessary to revive
the doctrine of a free market rate. Probably the period from 1815 to 1844
in England, with its theory beacd entirely on legal tender, expressed a
casual lapse of the money theorists, precisely as in the post-war period
we are now passing through. The above cited authors, whom for lack of space
we cannot quote, advance remarkable end decisive proofs for this supposition.

16. Clearing operations as completing the classical
system.— In principle, this originally Scotch credit end banknote system—
this system of well-considered reciprocal procuring of work— does not differ
in the least from the simplest bill operations, which were our starting-point.
The clearing operations which we are now to describe, only signal a refinement
end not a deviation from the idee that banks are organisahons intended
to facilitate the mutuaI safe of goods, end nothing else.
We have thus far assumed that the entire payment circuit is effected by
means of banknotes. To-day, however, we see a large proportion of payment8
made by the far simpler end cheaper non-cash method of cheques. For example,
the retailer, through whose hands pass nearly 40 out of the 45 milliard
marks of income from wages end salaries in Germany (1927), does not trouble
to despatch the banknotes he has taken to his suppliers: in registered
letters, but on the following day he paya in the day's takinga at his bank
end utilises the credit balance thua created for remithng cheques to his
suppliers. While at formers the circuit for perhaps 90 % of the ready money
circulating was—first stage: bank, wages department at the factory, wageearner,
shop; second stage: shop, wholesaler, manufacturer, bank,—to-day only the
first half of this circuit ia aerved by ready money, since the shopkeeper returns the notes
he receives ` directly to the bank end thus abruptly closes the circuit.
The shopkeeper, to be aure, does not pay this money into the act count
of the manufacturer, who, when the banknotes were issued originally, was
debited with the exchange credit, teut into his own. The credit transaction
is therefore by no meana ;; concluded with the paying in at the bank, teut
only transformed. In this way the deposits at the bank rise by exactly
the amount ; that the banknote circulation has diminished on the same day. With these collateral liabilities, the granting
of credits is continued. These new giro deposits, which supersede the second
stage of the classical circuit scheme, travel now, in the shape of cheques,
through the long chain of banking accounts of the suppliers and sub-suppliers,
until they finally reach the banking account of the original manufacturer.
At this point the bank credit, which formed the starting-point of. the
note circulation, is repaid. Simultaneoualy the giro deposits drop to the
original amount. A closer examination suggests that to-day the cash circulation in Cermany lasts about 11 days and
the connected giro circulation through the multitudinous giro centres,
another 15 days. This implies that in the case of such credits, the credit
periods would have to be fixed at 26 days on the average. To-day, accordingly,
it is,no longer the banknote holders who by means of their notes (which
signify a credit grant) elastically finance the circulation of goods,
for almost three-fifths of the credit possibilities are derived at present
from the holders of permanently alheted giro accounts. Note circulation
end giro deposits combined have, however, remained aa elastic as the note
circulation by itself. Both originate from an exchange credit end disappear
through its redemption. Both are independent of the amount of savings deposits
and of capital accumulation in a country, as well as of credits drawn from
abroad. It is therefore inadmissible to speak of the necessity of drawing
on foreign business capital. They involve no basic change as compared with
the simple scheme of early bill operations, teut, as we stated, only a
refinement thereof.

-B) The Gradual Destruction of the Classical Systemfrom 1909 to 1932 as Cause of the Difficulties encountered
in Re-integrating the workless.

1. Culmination and decline of the classical system.
—With the development of giro end cheque transactiona, which however
are yet capable of considerable extenaion (aa we have explicitly insisted),
the classica! system could be regarded as eseentially completed. It was
in operation in Europe for over a century, without reading to serious inflations
or abuses. It has survived economie crises, such as that of 1857, which
were equal to that of to-day. It has therefore proved its value. How the
decline end fall of this once famous system is to be explained, must remain
untold here. Does it not often happen that enormous successes leed to complacent
inaction, to the replacement of reading personalities by representative
ones, until the most intrepid leader finds it perhaps too difficult to
arrest the decline of what had been long established ?

2. The obscuration of the classical bank conceptions
through the separation of the functions between note and deposit banks—
Let us confine ourselves here to a description of German conditions, although
in England, France, Spain, Italy, and the United States the process of
development has taken almost the same course, as the reader can readily
ascertain. Just as in the case of the rise, so in that of the decline,
the general outlines alone need be noted, since it is only a question here
of the bearing of a century's development on the catastrophic position
of the banks at the present day.
The first downward step assuredly resulted from the~ separation of the
issue of notes from deposit bank business, which distinguishes already
externally present-day banking operations from the old Scottish banking
system. This brings us to the system of central banks of issue to be found
in almost all countries to-day, a system pictured as an incomparable achievement
of the human spirit, teut which is likely to be abandoned within half-a-century
end to moulder thenceforth as a scarcely intelligible conception in the
lumber-room of history. The separation of functions is in the main a historie
product. By the side of the banks of issue, which discounted bills end
also accepted deposits, arose in most countries (Apart
from Scotland end Canada. nese, in pursuance of normative Acts, have successfully
retained until to-day the system of the free issue of notes by all banks.
since the world war, however, this Act has unfortunately been debased bv
a forced currency, the notes having become lesal tender) large joint
stock banks fostering deposit transactions, end as a counterpart, credit
operations (originally a simple financing of turnover,
teut without the rigour that the names of the associated with bill transactions),
and developing enormously. They could naturally finance only the last three-fifths
of the goods turnover according to the classical system, inasmuch as they
could only seize for themselves a portion of the non-cash part of the payments
made. With regard to the cash portion, they remained dependent on the banks
of issue. This obscured for the first time the simple structure of the
classicaI system. The banks of issue became thus "banks of banks". To-day
they issue about 80% of their notes no longer to businessmen whose orders
for raw materials and goods turnover they can ascertain from their accounts,
but to banks which assure them bill issuers sound so well that they would
even unseen stand surety with their endorsement, an assertion that has
almost nothing to do with the contemplated exchange transaction—with the
conversion of the proceeds of sales into means of payment—and already embodies
the fatal substitution of the principle of security for the turnover principle.
The large scale deposit banks of to-day do not present all commercial bills
to the bank, but only some end these sopratically, when they are in need
of cash. The bank of issue thus loses all effective control. Lastly, they
offer their customers cash credit end hence businessmen have forgotten
to deposit bills, whilst, on the contrary, the banks of issue used to insist
on the old principle of the commercial bill. Hence the banks of issue had
eventually to be satisfied when they received obvious financial bills,
aa good bill material had become very scarce. The bank of isaue had, accordingly,
to "feel'' what number of notea should be issued, since it had lost direct
contact with the processes of exchange in business. It became a cash supply
centre for thc reading banks. It was not the bank of issue which determined
how much it was to issue, but the reading banks fetched as much as they
needed. This led to the now shoreless and now restricted issue of notes,
which characterises the non-bankable paper money in contrast to banknotes.
That, in turn, brought into deserved ill-repute this dangerous type of
means of payment which discourages the re-employment of the workless.

3. The centralisation of the banks of issue as the
boundary line in the transition from banknotes to paper money.—Simultaneously
with this development, proceeded the centralisation of the issue of notes.
The State entered into close relations with one of the banks of issue,
granting it privileges, entrusting it with its money transactions, end
accepting its notes at its pay offices. The notes of such a bank were bound
to gein an undesirable diffusion, which was no longer solely due to the
bank exchanging the daily proceeds from the sales of goods and the bills
based thereon into a more convenient means of payment, teut also to some
extent to the credit of the State. This bank became the "Central Bank of
Issue", the other banks of issue either disappearing or losing their old
status.
This monopoly, which is unapproached in any other field, could never have
maintained itself, if it had not offered the Exchequer — as distinguished
from the country— immense advantages. Fr. Knapp describes the frequently
recurring case where the State, when financially embarrassed, exploits
this rich bank as a source of credit. When the Central Bank, half constrained,
grants its "guardian", the State, large credits, which have nothing to
do with a turnover of goods, the question arises: "How is it eventually
to redeern the banknotes ?" It frankly cannot—that is, because the State
cannot repay on the day when the notes are presented for payment, after
26 days, say. Knapp continues: "The State is fully aware of this. Accordingly,
it decrees that the bank is released from the obligation to redeem them.
It declares these notes to be lega1 tender and thus the notes have to be
accepted universally at their face value. By means of this amazing procedure,
mostly regarded as an unfortunate mischance, the following becomes clear
to the disinterested spectator. The money circulation ... does not cease,
although the currency has changed its character. It consists no longer
of specie, teut of paper.... The State economy has deteriorated into a
' paper economy. (4th edition, pp. 120, 129. However,
Knapp by no meane opposed to a forced currency which, curiously enough,
is to-day regarded manifestly excellent, as until 1909 it was unanimously
condemned. Hence Carl Rosch rightly contends in his Kredit-inflation
(Jena, 1927), that banknotes which are accepted at public pay offices end
are legal tender, not banknotes, but simply State paper money. (p. 24.))The legal tender, represented by "banknotes" having a forced rate,
obeys quite other laws than the turnover bank rhoney of private under,
takings described in this paper. It may be, more especially, limitlessly
multiplied; it cannot be refused; and is therefore extremely inflational.

4. Decline and fall of the classical system through
the abandonment of convertibility and the introduction of a forced Currency.
—Thus even for those who cannot always see eye to eye with him, F.
Knapp, the postmaster of German monetary theory, in a convincing and impressive
manner, described in the decade preceding the War the approaching downfall
of the classical credit system, which soon afterwards was realised in Germany
and in almost all other countries except France. In 1909, Germany legislatively
provided that the Reich banknotes should be legal tender. Henceforth everybody
had to accept them nilly-willy at 100%, even when they dropped below the;
gold value of a claim. The obligation to redeem them, the last frail barrier,
fell in 1914. After the War, when the German economy was recovering,—just
when it was most desirable to return to the sound pre-war maxime in order
to expedite the recovery and to avoid spurious credits and untransferable
reparation payments,—there was apparently not even a demand for the abolition
of the forced currency. And the less important obligation to redeem banknotes,
only existed for about a year, from 17 May 1930 to 13 July 1931, at a time
when the burden of the foreign short-term indebtedness was already on the
point of crushing the German credit system. In such a desperate situation,
the redemption policy could not develop its hearing powers, since the free
market rate and the realisation of its significance were missing.

5. The abandonment of convertibility and its consequences.—
So long as this obligation was in force, or, to quote again Knapp,
"so long as the bank is bound to redeem its notes in money emitted by the
State, the latter had to take no further steps in order to relegate the
banknotes to their accessory position", (p. 125.) That is, in the circumstances
other precautions against inflation were unnecessary inasmuch as inflation
is only possible where a forced currency prevails. After the abolition
of convertibility, special brakes became necessary: the gold brake, or
gold cover, and the unreliable and always lagging price statistics; end
eventually, when both these had proved unavailing, the foreign exchange
brake. Thus the classical conception, whose rehabilitation is an urgent
necessity end which looks upon money end credit transactions as an expedient
for stimulating the safe of goods, is abandoned in favour of a quite different
type of money, i.e., paper money (in contrast with banknotes), whose peculiarity
it is to oscillate irresponsibly between inflation end deflation, which
alone is liable to the notorious eccentricities of 1923 end 1931/32, and
which only attends "casually" to the financing of turnover, necessarily
without achieving substantial results.

6. A forced currency regime, the idea of a Central
Bank, and inflationiam, are identical. —This dangerous and economically
injurious forced currency regime (see on this subject
the Cerman Bank Enquiry of 1908) would never have been introduced
if, in addition to its advantages for the Exchequer, it had not possessed
a peculiarity against which objective considerations could not prevail,
namely that, according to current beliefs, the financing of war was impossible
without a "strong Central Bank". In 1909, accordingly, as a preparatory
measure for a possible war, Germany, following the precedent set by other
countries, declared the Reich banknotes to be legal tender. During the
discussion relating to the establishment of Central Banks, it was repeatedly
stressed in all countries how important in the case of war (France
set the example. Compare Prof. Rist's authoritative world.)
a strong Central Bank of Issue would be. By virtue of these arguments the
purely economie arguments which mostly favoured decentralisation, were
silenced in all countries. (Mises is of the same
opinion (Theorie, etc., 2nd edition. 1924, p. 408): "Apart from the aspect
of financial readiness for war, the reasons adduced in favour of centralisation,
monopolisation, end Governments supervision of the banks of issue in particular
and currency banks in general are all untenable. During the last few years
banking literature has to such an extent lost itself in technical trade
details, left out of account economic considerations, and been influenced
by insipid statistical argumente that we have to return to the ideas...
that were prevalent two or three generations back, ... The control of the
banks of issue was supposed to be designed to protect poor and ignorant
folk against suffering losses from bank crashes. We need only mention this
argument to prove its feebleness . No banking policy could have been more
disadvantageous to individuals modestly situatted than that of State policy
during recent years.) As a matter of fact, free banks of issue
were conaidered as not "strong" enough for war purpoaes juat beeanae they
could not inflate. They were unable to grant the State war credits because
in four weeks' time they would be bankrupt as the result of their adventurous
exp,eriment in inflation. It was overlooked, as Frh. von Stein (1812) said,
that in a properly managed State with paper money having a free market
rate, we should have a far atronger and less dangerous means of financing
a war. Behind the drive towards a "strong Central Bank" was hidden the
desire to produce an inflation, and this could only be compassed by the
abolition of convertibility end the introdue, tion of a forced currency.
Ideologically end historically, the idee of a Central Bank end inflation;sm
are inseparable. It is henee not surprising that Gessel end many other
supporters of the Central Bank system recommend to-day the dropping of
the gold standard, thus openly avowing that they are inflationists. Every
determined opponent of inflation must in the last resort, be an opponent
of a "strong Central Bank", because this inevitable encourages a forced
currency regime end therewith inflation. On the same ground, he must desire
the return of the conditions prevailing prior to 1909 when, for good reasons,
the German economy passed through an unprecedented period of prosperity,
without having been menaced by inflation.

7. After the fall of the banks, followed the destruction
of the German monetary system through its passing from commercial bill
money to financial bill money.—Associated with this longprepared downfall,
is the catastrophic collapse that we shall now describe. Down to the summer
of 1931, the Reichsbank complied with §§ 28, 25, par. 6 end 21
of the Banking Act. These limit the operations of the Reichsbank quite
definitely, namely in the main to discounting bills maturing after at most
3 months, which, with gold and certain classes of cheques, may alone count
as note cover. § 28 reads: ~l (a) 40% gold cover; (b) for the remainder,
discounted bills or cheques, whieh comply with the requirernents espressed
in § 21. ,, Now § 21, close of par. 2, provides: "The billa discounted
by the Bank shall only be good commereial bills", end Dr. Hjelmar Schacht
refers to this important provision as follows in his commentary (p. 142):
"ln view of the object of the banks of issue, the already previously applied
principle that the bills discounted by the Bank shall be only good commereial
bills, is espressly laid down in the new Banking Act. Thereby the Bank
is prohibited from discounting other bills, e.g., so-called financial and
credit bills or bills that serve speculative purposes". The provisions
relating to penalties refer also to these two paragraphs, which proves
the special importance attached to them.
Thus the Bank of Issue Act permits only two kinds of banknotes. To set
the matter in a clear light, in accordanee with the terminology of §
28, we may designate these, after G. Ramin, as gold money end commercial
bill money. ( See the excellent report of the Gerrnan
Festmark Bank in Berlin of January 1932 also Francois Marsal, Encyclopedie
de banque et de bourse, vol. 1, p. 33.)
Contrary to these provisions, the Reichsbank, since the credit crisis of
1931, discounted financial bills to the amount of 2.000 million marke.
as is generally known and as is demonstrated by the creation of the Acceptance
and Guarantee Bank. These financial bills were accepted in order to maintain
the solvency of the illiquid credit banks which had gone too far with the
deposit system. In this case the Reichsbank did not grant advances on the
proceeds of sales, teut took over the illiquid assets of the reading banks
end of the savings banks, assets which do not liquidate themselves teut
require continuous prolongation, contrary to the 3 montha' principle of
the Act. ln addition, the Bank granted long term credits to the amount
of 1.300 million marks to municipalities end their savings banks. Since
the Bank was not authorised to grant these credits either, it masked these
illiquid loans by transforming them into bills and by the utilisation of
the Acceptance end Guarantee Bank which was specially created for circumventing
the law. Thereby a further provision of the Banking Act wee infringed,
hr § 25, par. 6, provides that the Reichebank may not, either indirectly
or directly, grant any credits whatever to the Reich, its component States,
and the municipalities, apart from a cash credit of 100 million marks and
a protective bill discount of 400 million marks (§ 21, nos. 2a end
3g). Moreover, the Bank neglected everything necessary for ensuring the
disappearance of the illegal end dangerous financid bill money end re-establishing
legal conditions.

8. The Reichsbank, temporanly the largest mortgage
bank, for lack of a sound banking system, present the re-employment of
the workless. —Through the Reichsbank ignoring from 1931 to March 1933
the provisions of the Banking Act end issuing financial bill money for
half or two-thirds of its note circulation, a prolonged moratorium for
the banks was, it is true, avoided, without, however, improving the situation
of these institutions end the industries and working masscs dependent on
them. The vanished deposits were replaced by obligations towards the Reichsbank.
The Bank became in a sense the largest depositor in the banks end was forced
to taking no action. It became increasingly dependent on the banks. The
debtors could pay less because the goods turnover steadily diminished end
because, therefore, sound turnover credits could no longer be adequately
financed. {Compare on this subject, e.g., the statements made by Dr. Schacht.)
Nothing remained save the forcible seizure of the means of production,
that is, of the factories, the land, etc., which could yleld practically
rothing end which led to the total depreciation of all book items end to
the ever-increasing embitterment of the conespondingly swdling masses of
unemployed.TABLE 1. (Editor's note:
sorry I'm not about to make sense of this table again, .........I will
scan it as an image upon request OK?) It showed 6 columns:one for time,one for the number of employed according to the (purged)
statistics of the aiclcnesa (sickness; a hard one
to figure out untill you grasp the morphs of scanbloops) funds,one for those receiving unemployment insurance,one for allowances and crisis assistence,one for welfare employed according to the district care
committees. (The numbers of recognised welfare
unemployed, ascertained at the same time at the employrnent exchanges are
uniformly smaller.)and a final one for the total number of employed at the
employment exchanges. 20 Henceforth the Reichsbank made advances
on real property and not on goods turnover. For a time, therefore, it was
thck largest German mortgage bank end ita notes at that period might be
accurately described as standardised and non-interest yiedding mortgage
bonds. The German banks, dependent as they were on the Reichsbank, were
thereby also paralysed. A banking system for facilitating the circulation
of goods and organising, the mutual securing of employment, was lacking.
In consequence, under the influence of these end other mistakes, the number
of unemployed in Germany rose to 6 million. If we include the statistically
not recorded—the eliminated unemployed, the number rises to some 8 million.
(See above tablet) Of their members of trede unions, 45 % were eventually
workless.Below, we shall continue listing the factors that explain
their slump in turnover credit, as this was the cause of these terrible
disasters.

9) Fateful compensation of an inflation of financial
bill money with a deflatiion of commercial bill money.If so much financial bill money had been issued in normal
times, an inflation would have been inevitable. That at the time there
was no inflation, is due to the fact that a corresponding amount of sound
commercial bill money had been displaced. In order to save the many shady
credits, an abnormal deflationary constriction of commercial bill money
was organised. Since turnover credit is as indispensable for the safe of
goods as freighting by railway or motor lorry, the goods turnover was perilously
interfered with. Thus about a third of the country's total goods turnover
wasi stopped in order to meet the categorical demands of institutions;
that did not serve the interests of the collectivity end so as to save
their directors, whose debit balances could not be examined because some
of them declared themselves to be experts end even resorted to scientific
arguments. Owing to the forced unsaleability of goods end the consequent
mess unemployment, solid undertakings were led in such numbers to the odge
of the economie precipice that the whole of the assets of the banks were
in jeopardy. The remedial measure recommended by selfish, ingenuous, end
scientifically untrained "experts" proved a destructive measure of the
first order for the banks this to such an extent that not even the private
fortunes of the bank directors could be protected, for the disaster asaumed
unanticipated dimensions and spread 1ightning-like.
It was supposed that a high interest rate would cause a rapid reflux of
financial bill money. Accordingly, there was a demand that the discount
rate should be raised to 30 %. But it was forgotten that in the case of
financial bill money, which has been the origin of all inflations yet experienced
the effective reflux of commercial bill money is of necessity absent, since
the involved credits are long-term ones. The pernicious consequence of
this mistaken theory of the advantages accruing from a high interest rate
was, that this enormous discount rak of sometimes 15 %, end later 10 end
7 %, was also applied to commercial bill money, which contributed still
further to the deflationary paralysis of the exchange of goods. Hence in
1932, Germany was placed before the alternative of either a primitive barser
of goods or a radical break with the present system by retuming to the
principles of credit approved by long experience.

10. Misconceived rehabilitation of the banks augments
unemployment.—The Reichsbank thus came to the rescue of tottering banks,
end this suggested that the State was behind them. This "quasi State guarantee",
led the population, when the crisis was at its height, to withdraw their
balances from the sound banks that aimed at increasing turnover end employment.
Furthermore, the sound undertakings were saddled with the cost of this
assistance to the banks, amounting to 1.500 million marks in taxes, whilst
the unsound banks were almost, or entirely, exempt from paying taxers.
The penalising of efficient undertakings end of finding work for the workless
was attended in the succeeding years by the worst conaequences. A large
proportion of the most reliable medium end small producers, on whom Germany's
wealth in men end workers end its strength more especially in export had
depended, were crushed out, whilst speculative concerns, managed by economically
inexpert persons end sustaining greater end greater losses, carried on,
until here also Dr. Schacht, in the spring of 1933, came to the rescue. Dr.
Luther had taken over early in 1930 from Dr. Schacht, President of the
Reichsbank, a sound Reichsbank, holding almost 3.000 million marks in gold
end foreign exchange end ample reserves. On 31 December 1931, according
to its balance sheet, the Reichsbank still disposed of the following imposing
holdings in gold end foreign exchange:—ASSETS. 1. Cold holding, unencumbered (bars, domestic end
foreign coins): (a) in the bank safes
1.993.550.688 marks (b) in foreign Central Banks
222.230.965 2. Holdings in foreign bills and cheques
290.733.661Holdings in foreign exchange, total 2.506.515.314
marks

Dr. Luther took over these holdings. When he departed
end handed back the management to Dr. Schacht, he bequeathed him an institute—decrepit,
encumbered with financial bills end bad credits, deprived of its reserves,
holding only 200 million marks in gold end foreign exchange—which was quite
incapable of financing the exchange of goods in Germany as demanded by
the Banking Act, and which was therefore face to face with immense unemployment
end numberless collapsing firms.
At the inception of the banking crisis in 1931, the Reichsbank had virtually
no debts end no liabilities abroad, precisely like the four small private
banks of issue. Hence the withdrawal of foreign credits from Germany could
not affect it in any way. The majority of the 800 private bankers, the
independent South German Banks with their branches, (E.g.,
the Bavarian Mortgage nnd Bill Ban}, with 130 branches.) two large-scale
Berlin banks possessing no branches, the 2.100 cooperative banks, end a
large portion of the 3.200 savings banks and municipal banks —in number
over nine-tenths of the German banks, —were equally welf prepared to meet
the foreign exchange problern resulting from the sudden recall of 10.000
million marks of foreign bank credits. The three large-scale Berlin banks,
with their 1.300 branches, a few mismanaged municipal banks, and a comparatively
small number of less important institutions , had taken up immense amounts
in foreign short-term credits end, against all the rules, lent them out
on long-term conditions. In July 1931, the Reichsbank end the Government
were faced by the problem whether they were to support the 35.000 sound
banks end bank branches which regulated the exchange of goods end the finding
of work among 20 million economically active individuals end leave to the
judgment of the courts the over-indebted end illiquid Berlin large-scale
banks, or the reverse. According to the information
published by the economie and statistical section of the Reichsbank regarding
the Banking Enquiry of 1933, the number of German ban}s end their branches,
ek., were aa follows at the close of 1931:

1. Private credit banks, in
the shape of joint stock companies:1. Berlin large-scale banks.....(a)
without branches.....(sound) ......(b) with branches .......2. Other joint stock banks, among
them 50 with branches .........3. Oversea bankers.... (3) end
special bank (62)......11. Private bankers, say
....III. Cooperative banks (6.8
million members)1. Workere' banks .......................2. Industrial credit cooperatives
......3. Agriculturai credit cooperatives
..4. Consumers' cooperatives, with
savings facilitiesIV. Public credit institutions:1. State banks end giro centres,
of which 27 having branches ......2. District banks ...........................3. Municipal banks end Saxon giro
centres .................................4. 9avinge banks ........................Grand total
39.344WHICH CONCLUDES TABLE 11.
once again sorry about omitting almost all numbers.....According to the above table, the 35.000 banks end branch
banks comprised about two-third end thc three unsound largescale banks,
etc., about one-third of the aggregate number. The large-scale banks were
primarily interested in the reading manufacturing firms, of which, according
to the official statistics of 1925, there were 66 employing severally more
than 5.000 workers end jointly only 559.000 workem, whilst the total number
of those gainfully occupied in Germany at the time was between 25 end 30
million. On the basis
of an experience of economie depressions ranging over more than 150 years,
the German Banking Act, by its provisions and penal clauses, bound the
Reichabank only to grant credit to sound banks and this only for turnover
and the securing of work through the exchange of goods end services, whilst
leaving the unsound banks to their fase. However, the Reichebank end the
Government were of a different mind. They slighted the Banking Act, which
was designed to prevent such abuses. They aided the unsound banks with
approximately 2.000 million marks in subventions and tax money. In this
way they offered a masked State guarantee to the unsound banks end indirectly
deprived the sound banks of their customers. They declared that "Germany's"
credit wee at stake; that "Germany" had contracted the debts; that a "run
on Germany" had broken out; whilst actually only the credit of a few ill-managed
banks with bank debts abroad, had been shaker. These, as was natural, were
called on by their careless creditors in England, Holland, the United States,
etc., to repay their debts. Partly to conceal the state of affaies, reparations
were dragged in. These were surely reprehenaible end foolish, teut they
could not hide the nefariousness of the banking methods which were shunned
by the great majority of the German banks. Thus thousands of banks and
bank branches were sacrificed to save a few who were in the good books
of the State. When the critical deciaiona were under discussion, the sound
bank groups were not consulted. In fact, the three unsound banks were identified
with the "German banking system "kicking
IMF addictions part two